Sourcing Strategy Best Practices – Bringing Spend … Milo & Patrick Baranowsky St. Louis, MO June...

Christopher Milo & Patrick Baranowsky

St. Louis, MOJune 2009

Sourcing Strategy Best Practices –Bringing Spend Analysis to the DoD

June 2009 ISPA/SCEA Professional Development and Training Workshop

Presented at the 2009 ISPA/SCEA Joint Annual Conference and Training Workshop - www.iceaaonline.com

1

Agenda

Purpose and Benefits

History

Frameworks

Case Study: Commercial SATCOM Spend Analysis


2

Agenda


History

Frameworks



3

I know my organization is spending millions of dollars, but…What goods or services are being purchased?

Who are my suppliers?

Who are my consumers?

Are expenditures consistent with policy?

Are expenditures cost effective?

What trends are being experienced?

How many different contracts are being utilized and to buy what goods or services?

Are buying patterns leveraging or diluting buying power?

These types of questions are faced by any organization procuringgoods or services and developing acquisition and sourcing strategies


4

The solution is “SPEND ANALYSIS” – a tool providing knowledge of what is spent, with whom it is spent, and how it is spent

Spend analysis provides benefits in three major areas:

Identify Cost Savings Opportunities

Identify Cost Savings Opportunities

Aggregating demand across an organization

Optimizing number of suppliers

Consolidating contracts

Identify high-cost procurements by comparing against industry benchmarks

Reveal strategic contracting opportunities (e.g., multiyear contracting)

Aggregating demand across an organization

Optimizing number of suppliers

Consolidating contracts

Identify high-cost procurements by comparing against industry benchmarks

Reveal strategic contracting opportunities (e.g., multiyear contracting)

Identify Potential RisksIdentify Potential Risks

Limited competition among suppliers

Low/variable demand

No contract in place

Maverick spending

Poor inventory management

Budget non-compliance

Policy non-compliance

Limited competition among suppliers

Low/variable demand

No contract in place

Maverick spending

Poor inventory management

Budget non-compliance

Policy non-compliance

Support Regulatory Compliance and Planning

Support Regulatory Compliance and Planning

Auditable record of expenditures

Sarbanes-Oxley (SOX) compliance

Small Business Administration interests

Budgetary and planning assistance

Auditable record of expenditures

Sarbanes-Oxley (SOX) compliance

Small Business Administration interests

Budgetary and planning assistance


5

Agenda


History

Frameworks



6

Many Fortune 500 companies have realized tremendous benefits through effective spend analysis

Hasbro negotiated an overhead rate 45% lower than previously obtained

Reduced temporary labor spending from $5M to $4.3M

Hasbro negotiated an overhead rate 45% lower than previously obtained

Reduced temporary labor spending from $5M to $4.3M

Maverick spending reduced

Solution ensured orders were sent to the proper supplier for the right goods, at the negotiated price

Maverick spending reduced

Solution ensured orders were sent to the proper supplier for the right goods, at the negotiated price

Chevron developed custom solutions to meet SOX requirements

Solution provided the ability to report and manage, proving compliance

Chevron developed custom solutions to meet SOX requirements

Solution provided the ability to report and manage, proving compliance

Identify Cost Savings

Opportunities

Identify Cost Savings

Opportunities

Identify Potential Risks

Identify Potential Risks

Regulatory Compliance and

Planning

Regulatory Compliance and

Planning

Benefit Anecdote Impact

Chevron, using a COTS spend management tool, was able to correct deficiencies in its financial data management

British Airways employed spend analysis to identify savings opportunities through preferred suppliers

Hasbro consolidated to a single supplier of temporary personnel after spend analysis revealed 17 suppliers for 7 locations


7

Various Government Accountability Office (GAO) studies advocate spend analysis as a best practice for Government

2002 2003 2004 2005

Report: Taking a Strategic Approach Could Improve DOD’s Acquisition of ServicesConclusion: Leading companies reengineered their approach to buying services with great success by taking a strategic approach to spending

Report: Improved Knowledge of DOD Service Contracts Could Reveal Significant SavingsConclusion: Leading companies have saved billions of dollars by developing companywide spend analysis programs and service contracting strategies; DOD could benefit from such practices

Report: High-Level Attention Needed to Transform DOD Services AcquisitionConclusion: DOD should promote use of best practices such as centralizing key functions, conducting spend analyses, reducing purchasing costs, and improving performance

Report: Using Spend Analysis to Help Agencies Take a More Strategic Approach to ProcurementConclusion: Having adopted spend analysis, some agencies have made good progress obtaining knowledge and improving their spending for goods and services


8

Recent DoD, OMB, and Congressional direction require continual data collection and spend analyses as part of the Government’s strategic sourcing effort

“Each agency’s CAO, CFO, and CIO are responsible for the overall development and implementation of the agency strategic sourcing effort, which begins with a spend analysis and identification of commodities for which strategic sourcing should be implemented.”

“[Senior Officials shall] monitor required data collection and conduct periodic spend analyses.”

“The Secretary of Defense shall, as part of the effort of the DoD to develop a revised strategy…perform a complete spend analysis of the acquisitions of the Department...”

October 2, 2006 – DoD provides revised services acquisition policy – including spend analysis language – to be included in the next revision to the DoD Instruction 5000.2

May 20, 2005 – Office of Management and Budget (OMB) releases memo outlining strategic sourcing efforts and the role of spend analysis in support of these efforts

January 6, 2006 – Congress directs DoD to perform a complete spend analysis of its commercial SATCOM procurement


9

Agenda


History

Frameworks



10

The basic spend analysis framework consists of five steps

Sources of spending identified across enterprise

Spending databases identified

Identify Data Sources

Collect and Aggregate

DataCleanse Data Enrich Data Analyze Data

Data collected from internal and external sources

Data combined into logical format to facilitate later steps

Data made consistent (e.g., names, units)

Questionable data identified and resolved

Data categorized appropriately

Obtain missing data

Merge any additional useful data (e.g., contract info)

“Slice and dice”data identifying useful trends and patterns

Different permutations of this basic framework exist, but at thecore, essentially the same tasks are executed


11

Identifying a complete set of spend data sources is critical to producing useful results

ObjectiveObjective

Identify the complete set of all possible spend data sources across the enterprise

Identify the complete set of all possible spend data sources across the enterprise

ChallengesChallenges

Disparate data sources

Numerous buyers across the enterprise

Data sources external to the enterprise

Disparate data sources

Numerous buyers across the enterprise

Data sources external to the enterprise

Best PracticesBest Practices

Start with most obvious sources such as Accounts Payable, General Ledger, ERP, and purchasing systems

Interview those responsible for purchasing to identify additional sources

Start with most obvious sources such as Accounts Payable, General Ledger, ERP, and purchasing systems

Interview those responsible for purchasing to identify additional sources





12

Data collection can be the most time consuming step in the spendanalysis process




ObjectiveObjective

Data collected from internal and external sources and combined into a logical format to facilitate subsequent steps

Data collected from internal and external sources and combined into a logical format to facilitate subsequent steps


Data maintained using differing applications and/or formats

Sensitive or classified data

Making contact with appropriate individuals managing data sources

Data maintained using differing applications and/or formats

Sensitive or classified data

Making contact with appropriate individuals managing data sources


Ensure senior-level support

Consider establishing an automated routine to extract spend data

Aggregate data using appropriate application

Persistently ping those managing data sources

Ensure senior-level support

Consider establishing an automated routine to extract spend data

Aggregate data using appropriate application

Persistently ping those managing data sources


13

Cleansing data is necessary – data integrity directly impacts the quality and effectiveness of spend analysis




ObjectiveObjective

Ensure consistency across all data and identify and resolve questionable data

Ensure consistency across all data and identify and resolve questionable data


Inconsistent data

Duplicative data

Inaccurate data

Incomplete/missing data

Miscategorized data

Inconsistent data

Duplicative data

Inaccurate data

Incomplete/missing data

Miscategorized data


Employ tools that can help identify missing or “dirty data”

Employ subject matter experts when cleansing data

Establish repeatable cleansing process

Employ tools that can help identify missing or “dirty data”

Employ subject matter experts when cleansing data

Establish repeatable cleansing process


14

Data must be enriched to facilitate insightful analysis




ObjectiveObjective

Ensure accurate spend categorization and augment data by filling in missing data, importing additional useful data, and adding reformatted or manipulated data to facilitate analysis

Ensure accurate spend categorization and augment data by filling in missing data, importing additional useful data, and adding reformatted or manipulated data to facilitate analysis


Properly categorizing spend

Obtaining missing data

Identifying data manipulation required to execute analysis

Properly categorizing spend

Obtaining missing data

Identifying data manipulation required to execute analysis


Employ subject matter experts when enriching data

Understand that data will never be 100% complete –do not “force” incorrect or inaccurate data

Employ subject matter experts when enriching data

Understand that data will never be 100% complete –do not “force” incorrect or inaccurate data


15

Analyzing the data provides an understanding of spending patterns that can be acted upon




ObjectiveObjective

Analyze the data to determine spend across various metrics, as well as trends in the data

Analyze the data to determine spend across various metrics, as well as trends in the data


Identifying pertinent analyses and results

Abundance of data can be overwhelming

Identifying pertinent analyses and results

Abundance of data can be overwhelming


Leverage industry benchmarks

Employ reporting and analysis decision support tools

Understand when a custom solution is required vice a COTS solution

Leverage industry benchmarks

Employ reporting and analysis decision support tools

Understand when a custom solution is required vice a COTS solution


16

Information gleaned from continual spend analysis, along with statutory and regulatory realities, may shape acquisition strategy



DataCleanse

DataEnrich Data Analyze

Data

Acquisition Strategy

Acquisition Strategy

Spend analysis should be a repeatable, iterative process

Over time, the spend analysis process should become more refined and more efficient


17

Agenda


History

Frameworks



18

In Section 818 of the National Defense Authorization Act (NDAA) for Fiscal Year 2006 DoD was tasked by Congress to perform a spend analysis of commercial SATCOM acquisitions

Perform a complete spend analysis of all commercial SATCOM services by the DoD from fiscal year 2000 through fiscal year 2005 and report on an acquisition strategy– Based on the spend analysis– Considers aggregating purchases and leveraging purchasing power– Includes multiyear contracting, or a statement of rationale why multiyear is not used– Proposes any required legislative action

Report due to Congress within five months of enactment of NDAA– Fifty percent of DISA’s Fiscal Year 2007 budget to be withheld until report submitted to

Congress


19

Several misconceptions existed among various DoD and commercial stakeholders regarding DISA’s procurement of commercial SATCOM

DSTS-G contract vehicle is inflexible –multiyear contracting options could offer additional cost savings

DSTS-G contract vehicle is inflexible –multiyear contracting options could offer additional cost savings

DISA’s excessive fees make it more expensive than other contracting alternatives

DISA’s excessive fees make it more expensive than other contracting alternatives

DISA’s fixed satellite services contract vehicle, the DISN Satellite Transmission Services – Global (DSTS-G), with an intermediary procuring bandwidth on behalf of DoD is more expensive than other contracting alternatives

DISA’s fixed satellite services contract vehicle, the DISN Satellite Transmission Services – Global (DSTS-G), with an intermediary procuring bandwidth on behalf of DoD is more expensive than other contracting alternatives

Misconception Spend Analysis Objectives

Compare cost of multiyear versus multiple year versus single yearCompare cost of multiyear versus multiple year versus single year

Compare cost savings achieved using DSTS-G to fees imposed by DISACompare cost savings achieved using DSTS-G to fees imposed by DISA

Compare DSTS-G costs to other contract vehicles, as well as market averages

Identify drivers and prevalence of cost discrepancies

Compare DSTS-G costs to other contract vehicles, as well as market averages

Identify drivers and prevalence of cost discrepancies


20

A robust spend data call effort was executed to collect the requisite data

Prepare data collection template– Identified 44 data elements vital to satisfying spend analysis objectives

Broad data call– DD350 and INPUT databases leveraged to identify data call recipients– Direct data call sent to over 200 DoD contracting offices– ASD(NII) officially tasked the heads of the CC/S/As to distribute data call – Top contracting offices identified contacted directly to request response

Data collection and consolidation– 73 responses were collected, representing over a billion dollars in spend over 6 fiscal years

Comprehensive data cleansing/enriching– Validate to ensure relevancy, accuracy and completeness– Standardize nomenclature– Verify content with SMEs as needed

Commercial Satellite Communications

Information Request


21

Effective analytics required informed, market specific analyses dependent upon industry technology and client goals

Appropriate spend/quantity segmentation– E.g., geography, buyer, supplier, technical

specifications, product type

Time phasing of services provisioned– E.g., spend vs. obligations

Appropriate cost normalization– Provide a means for apples to apples comparison

Rigorous analysis– Identify spend/usage profile, trends over time, cost-

effective procurement avenues

…

Service Characteristics

Mar

ket M

echa

nism

sPur

chas

e Inf

o

Band

C Ku …

Location

ASIA

EU R

Long…

Term Usage

Shor

t

Surg

e

Preemption…Fi

scal

Y

ear

Buy

ing

Ent

itySu

pplie

r

…

FY00

FY05

AB

Quanti

ty

Cost

…

AB

…

NOTIONAL

NOTIONAL

100,000’s of possible combinations exist… and each combination may require hundreds of

calculations

With regressions, cross-segmentations, and cross-correlations within a framework dimension, billions

of calculations are possible!


22

A systematic approach was needed to make sense of all possible analytic avenues and meet client objectives

Spend & Usage ProfileSpend & Usage Profile

Determine broad expenditure and consumption profile

Identify where primary spend is, for what, by whom

Determine broad expenditure and consumption profile

Identify where primary spend is, for what, by whom

Comparative AnalyticsComparative Analytics

Assess pricing across suppliers, programs, or contract vehicles

Determine most cost effective procurement avenues

Assess pricing across suppliers, programs, or contract vehicles

Determine most cost effective procurement avenues

Strategic AnalysesStrategic Analyses

Determine cost drivers and formulate cost estimating relationships

Identify opportunities for consolidation and leveraging of buying power

Determine cost drivers and formulate cost estimating relationships

Identify opportunities for consolidation and leveraging of buying power

Sum of Cost satopCostType Vendor 1 Vendor 2 Vendor 3HNA$ 1,411,294$ 1,882,104$ LTerm$ 1,335,000$ M&C$ 18,728$ 1,057,845$ 1,221,708$ Other$ 796,840$ 37,116$ 530,854$ PEquip$ 33,150$ 60,379$ 13,133$ Space$ 58,456,630$ 194,553,487$ 413,008,287$ Total$ 104,521,496$ 200,210,654$ 457,348,653$ TP$ 1,898,091$ 3,168,547$ 5,018,954$ TPEyrs 45$ 147$ 212$ Grand Total 165,724,979$ 400,499,470$ 880,358,907$

2000 2001 2002 2003 2004 2005

y = -151571x + 2E+062345678

0.00 2.00 4.00 6.00 8.00 10.00 12.00 14.00


23

Spend Analysis Findings: Bandwidth Increasing while Expenditures Level Off

Expenditures have begun to level off, yet bandwidth usage continues to grow– Per unit costs decreasing

2000 2001 2002 2003 2004 2005Fiscal Year

Total Spend ($)Bandwidth (MHz)

Total Expenditures and Bandwidth Usage by Fiscal Year

$ M

illio

ns

MH

z


24

Spend Analysis Findings: DSTS-G is Effective, Realizing Prices Below Market Averages and Other Contract Vehicles

DSTS-G contract vehicle has historically realized better pricing than other DoD vehicles and market averages

DSTS-G leverages its competitive construct and DoD’s buying power to achieve pricing efficiencies

While average transponder equivalent (TPE) cost and bandwidth volume remained flat for non-DSTS-G procurements…

…the increase in DSTS-G bandwidth volume has correlated to a decrease in TPE cost

Commercial MarketDSTS-G

DSTS-G MHz

$ M

illio

ns

MH

z

MH

z

$ M

illio

ns Commercial MarketOther DoD

Other DoD MHz


25

DISA and its Booz Allen team received significant accolades as aresult of Section 818 efforts

OSD(NII) GS15 feedback – “Best piece of work ever produced by DISA”

Congress – Released remaining 50% of DISA’s FY07 budget

Director of DISA – Personalized letters of appreciation for key Booz Allen staff

Recognition from the Satellite Industry Association (SIA)

Coverage in Military Information Technology Magazine


26

Contacts for additional information on spend analysis

Booz | Allen | Hamilton

Patrick BaranowskySenior Associate

Booz Allen Hamilton Inc.5201 Leesburg Pike, 4th Floor

Falls Church, VA 22041Tel (703) 575-7406

Mobile (703) [email protected]


Christopher MiloAssociate

Booz Allen Hamilton Inc.8283 Greensboro Drive

McLean, VA 22102Tel (703) 377-4077



Michael JerakisAssociate

Booz Allen Hamilton Inc.5201 Leesburg Pike, 4th Floor

Falls Church, VA 22041Tel (703) 575-5595



Sourcing Strategy Best Practices – Bringing Spend … Milo & Patrick Baranowsky St. Louis, MO June...

Documents

Transcript of Sourcing Strategy Best Practices – Bringing Spend … Milo & Patrick Baranowsky St. Louis, MO June...